Straight Talk About Economic Inequality

Last May the Paris-based Organization for Economic Co-operation and Development (OECD), a consortium of nearly three dozen advanced nations founded in 1961 to promote social progress and free trade, released a widely publicized study, “Growing Income Inequality in OECD Countries: What Drives It and How Can Policy Tackle It?” From the mid 1980s until the onset of the current global financial crisis, noted the authors, real disposable household incomes in OECD nations (the U.S. being one) increased annually on average by 1.7 percent. But growth hasn’t been evenly distributed, say critics. Too many people are being left behind, a reality owing heavily to increased foreign direct investment in OECD countries and rapid adaptation of new technologies that render long-valued skills obsolete.

America is now beset with inequality, the study noted ruefully. Indeed, our Gini coefficient not only increased, it increased to nearly 0.35 by the late 2000s, becoming in the process the least equalized of all surveyed OECD-member nations, second only to Mexico, whose figure was 0.45. Among nations with rising inequality, the Scandinavian countries and the Czech Republic had the least disparities. France, Hungary and Belgium exhibited negligible change. If it’s any comfort to us, the only countries experiencing less inequality over time were Turkey and Greece, with Greece winding up by far the more equal of the two. As an aside, most Greeks these days don’t seem impressed.

OECD saw the data as a wake-up call for an aggressive program of economic redistribution. The organization’s secretary-general, Angel Gurria, declared at the report’s launch: “The social contract is starting to unravel in many countries. This study dispels the assumptions that the benefits of economic growth will automatically trickle down to the disadvantaged and that greater inequality fosters greater social mobility. Without a comprehensive strategy for inclusive growth, inequality will continue to rise.” Translation: If you’re rich, prepare to part with a lot more of your money.

In America, meanwhile, the rich are getting richer at a far faster rate than anyone else, notes the Congressional Budget Office. This past October the CBO released a report, “Trends in the Distribution of Household Income Between 1979 and 2007,” concluding that inflation-adjusted post-tax income among the top 1 percent-earning households during this period rose 275 percent. For households in the top 20 percent income bracket, the real increase was 65 percent. This compares to the respective figures for the middle three (the 21st through 80th percentiles) quintiles and the bottom quintile of only about 40 percent and 18 percent.

Yet another widely cited report is an analysis of Census data released this past December by the Associated Press showing nearly 1 in 2 Americans are either poor or near-poor. AP researchers calculated that in addition to the 49.1 million Americans who fall below the federal poverty line, an additional 97.3 million persons live in households making between 100 and 199 percent of the poverty level. The calculations incorporated data on medical, commuting and other living costs, plus taxes.

With the market presumably unable to induce the top earners to pay their “fair” share of taxes, government must step in, the argument goes. Ours, at least, is trying. Last September President Obama unveiled a proposal to raise $1.5 trillion in new taxes over the next decade. The centerpiece of this initiative is “the Buffett rule,” named after investor Warren Buffett whose Forbes magazine-listed net worth last year was $39 billion. Buffett, a good friend of the president, had been complaining publicly that the effective tax rate in 2010 for him and his “mega-rich friends” was a mere 17.4 percent, well below the 36 percent paid by many employees of his company, Berkshire Hathaway. He may get his wish. The proposed rule stipulates that individuals making more than $1 million a year must pay at least the same rate as middle-income taxpayers of an unspecified range. It also would eliminate “special lower rates for the wealthy,” presumably a way of getting at dividends, long-term capital gains and interest carryovers taxed at only 15 percent.

President Obama insists that without such tough medicine, he won’t support Republican-proposed curbs on Social Security, Medicare and Medicaid spending. “This is not class warfare; it’s math,” he remarked in introducing his proposal. “The money’s going to have to come from someplace.”

The view that inequality in America is reaching crisis proportions, however, goes well beyond the White House. Many leading pundits take it as given. Rana Foroohar’s recent cover story for Time magazine (November 14, 2011), “What Ever Happened to Upward Mobility?,” opined, “(I)nequality is rising, now reaching levels not seen since the Gilded Age.” Atlantic magazine associate editor Max Fisher argued in September that without initiatives such as the Buffett rule, our latter-day robber barons might lead us toward oblivion. He wrote:

Income inequality is more severe in the U.S. than it is in nearly all of West Africa, North Africa, Europe, and Asia. We’re on par with some of the world’s most troubled countries, and not far from the perpetual conflict zones of Latin America and Sub-Saharan Africa. Our income gap is also getting worse, having widened both in absolute and relative terms since the 1980s. It’s not a problem that the “Buffett rule” would solve on its own, but at least the U.S. political system is starting to acknowledge how serious things have become.

That mass immigration from these “troubled countries” in large measure explains our condition is something Fisher does not acknowledge. But he is hardly alone in singling out the United States for slacking off in its redistributionist duties.

Here are a few more interpretations from the left side of the spectrum. Travis Waldron, a contributor to ThinkProgress, a blog project of the George Soros-funded Center for American Progress, remarked this past December: “The 99 percent Movement effectively changed the American political debate from debt and deficits to income inequality, highlighting the fact that income inequality has increased so much in the U.S. that it is now more unequal than countries like Ivory Coast and Pakistan. With those numbers are startling, a study from two historians suggests that American wealth inequality may actually be worse than it was in Ancient Rome – a society built on slave labor, a defined class structure, and centuries of warfare and conquest.” New York Times reporter Charles M. Blow expressed alarm over a Gallup Poll released last month that found Americans were apparently apathetic to the economic chasm. The survey found that the percentage of Americans viewing their country as divided into “haves” and “have-nots” experienced the largest drop in two decades. Blow admonished: “This is the new American delusion. The facts point to a very different reality,” the reality, he proceeded to explain, being the findings of the Associated Press, CBO and OECD studies. Meanwhile, New Republic Senior Editor Timothy Noah, writing in the webzine Slate in September 2010, argued that it is land area more than anything else that buffers us from collapsing into Third World status:

Why don’t Americans pay more attention to growing income disparity? One reason may be our enduring belief in social mobility. Economic inequality is less troubling if you live in a country where any child, no matter how humble his or her origins, can grow up to be president. In a survey of 27 nations conducted from 1998 to 2001, the country where the highest proportion agreed with the statement “people are rewarded for intelligence and skill” was, of course, the United States (69 percent). But when it comes to real as opposed to imagine social mobility, surveys find less in the United States than in much of (what we consider) the class-bound Old World. France, Germany, Sweden, Denmark, Spain – not mention some newer nations like Canada and Australia – are all places where your chances of rising from the bottom are better than they are in the land of Horatio Alger’s Ragged Dick.…(I)ncome distribution is actually declining in Latin America even as it continues to increase in the United States. Economically speaking, the richest nation on earth is starting to resemble a banana republic. The main difference is that the United States is big enough to maintain geographic distance between the villa-dweller and the beggar.

Such quotes underscore some dominant assumptions: Economic inequality is rapidly worsening. Tolerating its further progression would be an injustice. And America bears a special moral burden to rectify the situation.

These assumptions need to be challenged. Here, then, in abbreviated form, are several reasonable retorts.

First, affluent households didn’t get that way off the backs of others. “Income is not a zero-sum game,” notes economist Steven Kaplan of the University of Chicago. “Somebody else’s income does not come at your expense. It could…but in general these numbers don’t have automatic implications for the 99 percent.” In 2011, the number of millionaire households in the U.S. was 8.4 million, an 8 percent rise from the year before. Can anyone argue that this increase caused suffering among non-millionaires? By the logic of zero-sum economics, non-millionaires should have done very well in 2008, a year in which the millionaire population dropped by 27 percent. As we all know, it was a bad year across the board.

Second, the number of households in income quintiles for any given year will be identical, but the roster is constantly changing. Those in the top income brackets in 1979, or for that matter 1999, weren’t necessarily the people who were there in 2007. Let’s have a look at the millionaires so reviled by the Occupy Wall Street demonstrators. The Washington, D.C.-based Tax Foundation recently went over IRS tax returns for 1999 of 675,000 millionaire households and followed them on a year-by-year basis through 2007. Just one year later, in 2000, only 338,000 of these households had remained millionaires. And only 38,000, a mere 6 percent of the total, had retained their millionaire status for the entire period. Even more crucial were advances in upward mobility. The Tax Foundation study revealed that three-fifths of the households in the bottom quintile in 1999 had moved to a higher quintile by 2007. And about a third in that lowest quintile had moved to the middle quintile or higher. “The land of opportunity” remains more than a cliché.

Third, income is related to family structure. Non-elderly husband-wife families have higher incomes than other households, if for no other reason, than the fact that married couples have two potential full-time earners. But they constitute a progressively falling share of U.S. households. In 2010, they represented 48 percent of all households, down from 53.8 percent in 2000 and 56 percent in 1990. In constant (2009) dollars, the median income of married-couple families in 1990 was $63,469, rising to $71,627 in 2009. For female-headed households, no spouse present – which has accounted for about 30 percent of all households for the past two decades, but more than double from 1970 – the respective figures were a mere $26,937 and $29,770. Related to this, 40.7 percent of female-headed households in 2010 lived below the poverty line; for married couples the figure was 8.8 percent.

Fourth, immigrants, legal or otherwise, constituted 40 million of the nation’s population in 2010. That was up from 19.8 million in 1990 and 31.1 million in 2000. As a proportion of the total population, the respective figures for 1990, 2000, and 2010 were 7.9 percent, 11.1 percent and 12.9 percent. A little over half in 2010 consisted of Hispanics. Though not necessarily immigrants, Hispanics do serve as an effective proxy for research purposes when detailed ethnic breakdowns on immigration are not available. And the Hispanic population increased during 2000-10 by a whopping 43 percent, whereas the non-Hispanic population as a whole rose by about 5 percent. Moreover, Hispanic incomes in 2010 were only $37,759, well under the $54,620 for non-Hispanic whites. Putting these things together – rapid population growth and far lower incomes among Hispanics – an inconvenient truth comes out: Widening inequality is largely driven by an “inclusive” immigration policy. Don’t expect any presidential candidates, Democrat or Republican, however, to make this point.

Fifth, inasmuch as other countries, especially in Europe, have less income inequality than us, it is largely because their larger welfare state edifices rest heavily on high taxes and bank debt. Many European Union parliaments lately have passed, or are considering passing, tough austerity packages to avert pending disaster. Here is one disturbing indicator: EU nations have a composite 20 percent unemployment rate for persons under age 25. For Italy, Greece and Spain – each in deep financial crisis – the respective figures are roughly 28 percent, 38 percent and 45 percent. European investment advisor Patrick Young puts it this way: “The eurozone bailout fund is on the verge of running out of money as soon as one of those major economies such as Spain or Italy defaults.” Even governments that pursue economic equality, in other words, are coming to grasp its inherent limits. They have no other choice.

There are other arguments against aggressive equalization of incomes, such as the Census Bureau’s non-inclusion of in-kind benefits (e.g., Medicaid, housing vouchers, food stamps) as reportable income. The larger point is that economic equality, beyond a certain point, can be achieved only at a high cost. It’s true that a nation can’t afford to leave segments of its population behind. But way to inclusion, here or elsewhere, shouldn’t burden the most productive members of society with high taxes in order to cover the bills of those who can’t or won’t pay them. Inclusion instead ought to be achieved through such means as economic growth, low taxes, enforceable property rights, free flows of information and limited immigration. Liberty shouldn’t be expendable.

Carl F. Horowitz is director of the Organized Labor Accountability Project of the National Legal and Policy Center, a Townhall.com Gold Partner organization dedicated to promoting ethics in American public life.

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